Watchdog's link to US bank fiasco

By Nick McKenzie, Richard Baker and Simon Mann

November 11, 2011 — 3.00am

THE new chief of Australia's corporate watchdog is facing questions about his past role with a major international bank that has been accused in the US of breaking corporate laws and engaging in misconduct.

Greg Medcraft was hand-picked by the Gillard government earlier this year to chair the Australian Securities and Investments Commission, and took up his powerful, $700,000-a-year post in May.

It has since emerged that a bank with which Mr Medcraft held a senior position, Societe Generale, is being pursued in the US over massive transactions involving sub-prime home mortgages in the lead-up to the global economic crisis.

The US Federal Housing Finance Agency has alleged in a lawsuit that Societe Generale's securitisation business - which Mr Medcraft oversaw - was negligent, did shoddy due diligence and seriously misled two American loan providers, Fannie Mae and Freddie Mac.

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The law suit was lodged in the US District Court in New York in September. It follows a 2008 class action in which seven former Societe Generale employees alleged that the French-based bank's US securitisation business engaged in fraudulent conduct between 2005 and 2008.

Mr Medcraft is not named in either action. However, he oversaw the US Residential Mortgage Backed Securities business during the period it is alleged to have engaged in misconduct and breached corporate laws.

The Age can also reveal that Mr Medcraft, who worked for Societe Generale between 1999 and late 2007, was named in a 2004 sex discrimination law suit.

The suit alleged he approved $4000 to pay for clients to attend a strip club, commented on a woman's legs and discriminated against an employee. It was confidentially settled in court and the plaintiff, a female employee, received a modest payout.

Mr Medcraft, who was the subject of no adverse findings, said last night all claims against him were withdrawn, that the bank ''made a contribution to the plaintiff's legal fees'' but a confidentiality clause stopped him commenting any further.

The opposition has seized on the revelations about 55-year-old Mr Medcraft, questioning the government's decision to make him ASIC chairman without advertising the role - breaching Labor's election policy on senior public-sector appointments.

Shadow assistant treasurer Mathias Cormann said it appeared Treasurer Wayne Swan appointed Mr Medcraft - a former ALP member who resigned from the party in 1996 - "purely on party political allegiance instead of a proper and competitive assessment of merit."

"Julia Gillard has to force Wayne Swan to give a full public account of what he knew about Mr Medcraft's history in the US and why he decided to ignore the government's own merit-based selection process when appointing him as the new chair of ASIC," Senator Cormann said.

Mr Swan declined to answer questions about the extent of due diligence conducted before Mr Medcraft's appointment or why the government failed to

advertise the role. A spokesman for Mr Swan said Mr Medcraft was well qualified to lead the watchdog through continuing volatility in global markets, ''with three decades of experience across several regions, which earned him wide respect among both regulators and governments.'' Before becoming chairman, Mr Medcraft spent more than two years as an ASIC commissioner.

Asked if he had ultimate responsibility for the securitisation operations scrutinised in the US law suit, Mr Medcraft referred The Age to a 2005 press release which described him as the leader of the French bank's securitisation business, including its American arm.

''I stepped down as Global Head of Securitisation on 30 June 2007,'' Mr Medcraft said last night. He said he was responsible for ''securitisation arranging, structuring and advisory. I was not responsible for the syndication, trading or sales of SG's securitised debt products''.

Court documents shows that Societe Generale is one of 17 institutions alleged by the US housing agency to have violated federal securities laws and common law by negligently misrepresenting their products and providing "false or misleading" information to Freddie Mac and Fannie Mae in 2006.

The business named in the US action was created by Mr Medcraft in 2005. Mr Medcraft helped hire and oversee the executive Arnaud Denis, who is named with three other team employees in the law suit.

According to the US law suit, Arnaud and his co-defendants ''had enormous financial incentives to complete as many [securitisation] offerings as quickly as possible without regard to ensuring the accuracy or completeness of the [information] … or conducting adequate and reasonable due diligence.''

Responding to questions sent to Mr Medcraft by The Age last week, an a ASIC spokesman said Societe Generale ''adopted best management practice in establishing its businesses and had internal controls in place to verify best-standards for the process of it acquiring assets.'' He also said the bank undertook appropriate due diligence.